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January 16, 2013

Morgan Stanley Bonus Deferment Seen as Warning Shot

The plan does not affect financial advisors this year, but could be a sign of things to come industrywide, experts say

Morgan Stanley headquarters in Times Square. (Photo: AP)

In a move that seems aimed at pleasing shareholders before Friday's earnings, Morgan Stanley (MS) has introduced a three-year timetable for the payment of bonuses to some staff, according to several news reports late Tuesday.

Morgan Stanley’s latest plan does not affect financial advisors; however, such plans could be rolled out in the future throughout the brokerage industry, experts say.

Under the new plan, Morgan Stanley employees who make more than $350,000 a year, like traders and investment bankers, and are set to receive cash bonuses of $50,000 and up, will have these payments deferred and also paid out with both cash and stock, a Reuters report explained. (A Morgan Stanley spokesperson declined to comment on the news.)

“The impact on the retail business is indirect but important,” said Chip Roame (right), managing partner of the consultancy Tiburon Strategic Advisors, in an interview with AdvisorOne. “This makes it easier for the firm to support similar moves directed at financial advisors, because the firms can point to responsible pay practices across the firm.”

Last year, Morgan Stanley put a cap on immediate cash bonuses at $125,000 for its highest-paid employees and deferred the rest, according to a Wall Street Journal report.

Earlier this month, Morgan Stanley said it was cutting 1,600 jobs in its institutional operations to lower costs. The firm plans to release its fourth-quarter earnings results on Friday.

“It's never a morale booster to be with a firm that's retrenching in core business areas,” said Mark Elzweig, an executive-search consultant, in an interview. “Advisors will wonder, for instance, if their IPO flows will be reduced and if trading desks will now hold less inventory (of fixed income).”

Nonetheless, the New York-based Elzweig says, the retail-brokerage business remains critically important to Morgan Stanley, as it does to the rest of Wall Street. “Morgan Stanley has even introduced an asset-gathering award program for advisors in 2013 … and will continue to pay whatever it takes to attract new advisors with solid books of business.”

Under the new bonus plan, Reuters reports, non-advisor employees will receive 25% of their cash bonus in both May and December of 2013, another 25% in December 2014 and the final 25% in December 2015. The stock awards will be paid at the end of 2013 (25%), 2014 (25%) and 2015 (50%).

Those employees who make less than $350,000 and whose bonuses are less than $50,000 can expect to receive their full cash bonuses in February.

The latest moves “are solid strategies,” said Roame. “Eating one's own cooking and tying one's success to that of [his or her] firm are both long-existing best practices in the investment business.”

This is because, when a professional in the business “knows they must stay around a few years to get a full pay out and their trades or deals must not blow up, they think more thoughtfully about the long-term impact of transactions,” Roame adds.

Plus, the bonus shifts could generate goodwill with more than just investors, Roame says. “Regulators, consumer activists, risk-management pros, and people like me think this is how a business should be run: Employees do well when the firm does well,” Roame said.